Incorporation Definition

Incorporation is the process of legally forming a company as a separate entity, distinct from its owners, with rights and responsibilities under the law.

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As the name suggests, incorporation is the process of forming a corporation. But what does this term really mean in business? Furthermore, what are the advantages and disadvantages of incorporation? 

Get the answers to these questions and more below. Plus, learn how we can help you start, run, and grow your own business. 

What is incorporation?

As we mentioned, incorporation is the legal process of forming a corporate company or entity. This process results in the separation of the company’s (corporation’s) income and assets from those of its owners or investors. 

Incorporation Process

Forming a corporation involves filing Articles of Incorporation (or your state’s equivalent) with the Secretary of State in the state where you do business. We’ll cover the full process in the “Steps to Incorporate” section later in this article.  

Incorporation Benefits

Incorporation offers several advantages to business owners, but there are also some disadvantages or considerations you need to weigh. 

Advantages of Incorporation

Just a few of the advantages of incorporation include: 

  • Limited liability
    • Because cash flow and assets of a corporation are legally separate from those of its owners, the owners’ assets are protected from the liabilities of the company. 
  • Creating a defined corporate structure enables you to clarify ownership and responsibilities
  • Easy transfer of ownership / interests
  • Corporations can typically acquire funding / loans more easily
  • Boosted credibility in the eyes of potential investors, customers, etc. 
  • The life of a corporation can extend beyond the lives of its founders
    • By changing board members, directors, etc., a corporation can continue indefinitely. 
  • Advantageous tax rates
  • Ability to raise capital through sale of stock
    • Incorporating gives you the legal right to sell stock. 

Disadvantages of Incorporation / Considerations

While the benefits of incorporation are numerous, there are also a few potential downsides or pitfalls you need to consider: 

  • Incorporating can be costly thanks to fees
  • Forming a corporation involves lots of paperwork
  • Corporation company profits are often double-taxed
    • Corporations are first taxed on their net taxable income, then business owners are taxed on their salary and dividends. 
  • Corporations are subject to strict compliance regulations

Types of Corporations

C Corporation​

A C corporation (C corp) is a type of corporate structure that offers the strongest legal protection to its owners. Filing as a C corporation is a legal procedure that allows corporations to profit and be taxed accordingly. Although C corporations protect their owners from personal liability, they need extensive record-keeping, reporting, and operational processes.

Shareholders relation to the C Corporation

C corporations are structured so that if a shareholder decides to leave the company and / or sell their shares, it can remain undisturbed. The lives of shareholders and the corporation are completely independent of each other. Because of this structure, C corporations are a great choice for medium- to high-risk businesses or businesses that plan to be sold or “go public.”

S Corporation​

An S corporation (S corp) is designed to avoid the double taxation issues of C corporations. Taxes can be passed directly through the owners’ personal income, avoiding corporate tax rates. Most states recognize S corps the same way that the federal government does and tax shareholders according to those laws. 

S Corps are not all taxed the same

Since each state can set its own laws for corporations, not all S corps are equally taxed. For example, some states do not recognize S corporations, taxing them like C corporations. In other cases, certain states might tax S corporations in profits above a specified limit.

Nonprofit Corporation​

A nonprofit corporation is designed to do charitable, religious, educational, literary, or scientific work. Nonprofit corporations work for the public and can receive tax-exempt status, which means they do not pay state or federal taxes for any income or profits.

In addition to following rules that are very similar to a C corporation, they also follow a special set of rules about what to do with any profits.

Steps to Incorporate

To incorporate your business, you will follow these general steps: 

  1. Name Your Corporation
  2. Appoint Directors
  3. Choose a Registered Agent
  4. File the Certificate of Incorporation / Articles of Incorporation
  5. Create Corporate Bylaws
  6. Draft a Shareholder Agreement
  7. Issue Shares of Stock
  8. Apply for Necessary Business Permits or Licenses
  9. File for an EIN and Review Tax Requirements
  10. Submit Your Corporation’s First Report

This process will vary depending on your state, and what type of corporation you’re forming. You can learn more here

Incorporation Examples

Examples of companies that are incorporated include those with names that include labels such as: 

  • Incorporated
  • Inc.
  • Corporation
  • Corp.
  • Any abbreviation of the word “corporation” or “incorporated”

We Can Help

Ready to turn your business idea into a reality? Whether you’re forming an LLC or a corporation, we’re here to support you through every step of the way. From formation to compliance, we’ve got all the worry-free services you need to start, run, and grow your business. Reach out to us today! 

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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Written by Team ZenBusiness

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